A Guaranteed-Return Structured Product as an Investment Risk-Hedging Instrument in Pension Savings Plans

Abstract

This study proposes a structured product (SP) for hedging defined contribution pension fund members against capital market risk. Using Monte Carlo simulations on three different guaranteed returns to test the investment strategy of the SP against a balanced investment portfolio, we measure their performance across a wide variety of capital market returns and risk scenarios. The results show that the SP guarantees a minimal return on the pension savings portfolio and offers a higher portfolio return at a lower investment risk, compared with the balanced investment portfolio. We conclude that the SP may become popular among pension fund members, potentially leading to improved risk management, greater competition, and investment strategy innovations for defined contribution pension schemes.